The Fraser Institute thinks deficits should be the cause celeb of Canadian elections. Do you?

Maybe. But it all depends on how the issue is framed. Over at the FP online Niels Veldhuis and Jason Clemens are all sweaty under the collar from working overtime on trying to convince us that slaying the deficit is the single biggest issue facing Canadians and the conservative government. In their subtly* titled comment “Cut spending now” they argue provocatively that the government must reduce the deficit to zero not some time in future but over the next two years.

A true austerity plan aimed at balancing the budget would have taken a page from former prime minister Jean Chrétien and finance minister Paul Martin’s 1995 plan. The reforms by Chrétien/Martin eliminated a deficit much larger than the current one (4.8 % of GDP compared with 2.8%), within three years.

Chrétien and Martin’s 1995 plan proposed cutting program spending by almost 9% over just two years to get a handle on federal spending. These weren’t reductions in spending growth. These were actual reductions in spending.

Even more impressive is that Chrétien and Martin outperformed their goal and reduced spending by 9.7%.

This represented a remarkable fiscal transformation that, in part, made Canada the envy of the developed world. Spending reductions, balanced budgets, and debt repayment contributed to our outstanding economic performance from 1997 to 2007.

To emulate this success, Canadians need a serious commitment to balancing the books. The sooner the government gets its fiscal house in order, the sooner it can take action to reduce taxes and improve the country’s competitiveness. To that end, Mr. Flaherty should put forth a true austerity budget that actually cuts spending to balance the budget over the next two years.

It would be sad indeed if the Fraser Institute and the National Post succeeded in making a balanced budget in two years the frame of the fiscal debate and the central issue in the upcoming election. Here is why. Scale the deficit out of GDP and the miraculous Canadian recovery does not exist. In fact without the deficits run by the provincial and federal levels of government nominal GDP would still be at Q4 2007 levels. Nothing makes the point more poignantly then a graphic.

The deficit hawks want to make the case that we are in perilous times, that immediate and austere, tough manly action is required tout de suite within the next two years to drive the governments’ fiscal houses into balance and then some.

But what about the macroeconomic balance: just where is the stellar private sector growth of +/-  3% of GDP per year over the next two years going to come from to make up for the decline in government spending?  Analysts over at Scotiabank have a nice little table in their Global Forecast Update estimate that in 2011 and 2012 that without federal deficit spending real GDP growth is going to be 0.7% of GDP and 1.5% respectively.  None of this of course takes into account what would be the real implication of a 3% reduction in aggregate demand in each of 2011 and 20012.  If there is any multiplier at all to deficit spending those forecasts would have to be adjusted even further southward.

This is not 1995, debt to GDP is lower and so too is the deficit.  Further it looks as though that it was only in Q4 2010 that the Canadian economy managed to climb back to its q3 2008 level which was only achieved by deficit spending.  And even with that deficit spending we are nowhere near back to 1995.  So why all the hand waving and warmongering over the deficit?

Much of it is a genetic trait of neo-conservatism, much of it do with the lack of originality in the Canadian conservative movement in that it seems only capable of echoing is conservative cousins south of the border, and much of it has to do with a certain amount of nearing or in retirement age sub-urban idiotic ranting myopathy.  I am not convinced they can even divine their own narrow self interest at this point.

The fact is we do not even hear the private sector clamouring for public restraint at this time.  Business knows that without government deficits into the near future revenue growth is going to be anaemic.  Sure they are protesting to keep their scheduled tax cuts but that is about who is going to pay for the stimulus not about deficits per se.

Should deficits become the cause celeb of the Canadian elections they should only be so in two ways.  Do we need to commit to higher projected deficits in the short term to get the unemployed and underemployed back to work? And who is eventually going to pay for them?

* I say subtly titled because they, unlike my undergraduate students, had the sense not to throw an exclamation mark on the end which demonstrates a little restraint on their part… so credit where credit is due. Pun intended.

2 thoughts on “The Fraser Institute thinks deficits should be the cause celeb of Canadian elections. Do you?

  1. Are we talking about the deficit that the Conservatives created in the first place by:
    1. Outrageous spending on defense and prisons that we don’t need?
    2. Unimportant roads and ‘infrastructure’ programs that surely lined the pockets of many of their friends and in their own ridings?
    3. Forcing a structural deficit as a result of bad tax strategy (ie. cutting a perfectly good consumption tax and giving corporations a free ride)?

    This government should talk about deficits because they’re very good at creating them. They are extremely poor managers when it comes to keeping things under control and if I were a Conservative, I’d be ashamed of the way the mismanaging this economy.

    But then, they’re just looking for an excuse to slash away at public programs, using ‘austerity’ as an excuse.

    They’re nothing more than a bunch of hucksters.

  2. My figures on deficit spending were for both the provincial and federal levels. And of course I think there is the need for a conversation about what the conservatives have deficit spent on. But that is different question. I too think foreign wars and shiny new planes are not only a waste of money but of greater immoral nature. I would rather see that money spent on public investments that raise the medium to long term trend rate in productivity growth. But again that is a different conversation.

    The FP and FI want balanced budgets in two years and act as though deficit spending was some moral failing of the cons and not a necessity of the recession. That was the point of the graphic: no deficit spending = prolonged economic slump.

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